Funding Cleantech With Blockchain: 9 Things To Consider

Blockchain is hot right now, perhaps at the peak of its hype cycle, perhaps not. It is the underpinning of bitcoin, but also has the promise to be a disruptive technology in multiple sectors. Now it’s time to look at cleantech funding in more depth.

I started my exploration of how it will impact electricity’s transmission, distribution and sale in Bitcoin’s Hot But Blockchain For Cleantech Is Interesting, continued in a 3-part series of articles on the nature of smart contracts based on blockchain technology and their applicability to electrical generation and distribution and most recently explored 5 use cases for blockchain in the cleantech space.

This article will look how initial coin offerings and other blockchain-related funding models can be used for cleantech ventures. Foreshadowing: while originally it was an unregulated space, securities agencies are increasingly applying regulatory frameworks to it and tax agencies are increasingly looking for their cut.

Initial Coin Offerings (ICOs)

These are the IPOs of 2017, and like the dot-com IPOs of 2000 they are raising money incredibly quickly and often based on the thinnest of premises of future revenue. It’s a highly speculative area.

But it is an area where cleantech has raised some significant money.

Power Ledger is building a peer-to-peer blockchain energy-trading system. It raised $34 million AUD in an ICO in 2016.

Grid+, which is building an app and home appliance which expose electricity costs, help reduce usage and arbitrage the most economical use of local renewables, storage and grid electricity sold 39 million tokens with a value of $32 million in its ICO in 2017.

WePower, which is building a blockchain platform to allow renewable projects to get funding. raised $3 million in its public pre-ICO with the formal and full ICO coming in February 2018.

Solar Bankers, another micro-grid startup with interesting solar-film technology, relocated to Singapore from Arizona and is running an ICO with a goal of raising $300 million. History suggests that they’ll get less than that, but they’ve sold over 25 million of their SunCoins to over 1,600 contributors so far, over 25% of their hardcap.

That’s more than $60 million already flowing to cleantech offerings with more coming.

That is all money flowing in the form of cryptocurrencies, and the value fluctuates so rapidly and so much that pegging a specific amount to it is challenging. Bitcoin is the most famous example of this, with its value against the US dollar fluctuating from around $3,600 three months ago to a high of over $19,000 before dropping in the past week to around $14,000. Ethereum has risen from around $280 to a peak of about $850 before dropping to around $650 over a similar period.

It does beg the question about whether the money-raising firms have kept the proceeds in cryptocurrency or hedged by moving a fair amount of it to fiat currencies.

Executing an ICO

When raising money through a coin offering, most groups don’t create their own version of bitcoin or Ethereum. Instead, they typically leverage Ethereum’s blockchain and smart contract programming language to create something referred to as tokens. A token is like a share. Ethereum isn’t the only blockchain platform around, but it is the most widely used. Solar Bankers, as an exception, is using the new SkyLedger blockchain platform.

A key initial part of an ICO is a whitepaper articulating exactly what the new coin is supposed to do, what the money will go toward and how the ICO will be executed. The smartest ones translate the whitepaper into multiple languages, as Power Ledger did.

ICOs are open for periods from a week to a month and individuals ‘invest’ by purchasing tokens. There are a handful of models for recouping the investment, but the primary two are increases in the market value of the tokens and dividend approaches which return a fraction of the profit from the business venture back to token holders.

There are various guides to ICOs out there, but remember that this is a new space, there is no certification or education that particularly applies and there are a lot of self-appointed experts, including me.

Taxes and regulation

Until recently, ICOs were considered a form of crowd-funding, a specialized form of Kickstarter or Patreon. This has allowed groups running ICOs to avoid the heavy regulatory burden related to securities. However, there have been moves by the US SEC and other countries’ equivalent organizations to start characterizing ICOs as securities sales.

This has pros and cons for the individuals running them. If an ICO is a securities sale, then the proceeds are consider debt or equity and hence not taxable in most jurisdictions. If revenue is expected to start flowing in future years, then they have capital to execute on their business plan without a tax burden. But conversely, if they are securities, then they fall under the fairly restrictive and certainly complex security regulations framework which is intended to protect investors and prevent fraud.

The alternative, which many ICOs attempt to do by careful choice of language, is to have the proceeds characterized as income or corporate revenue instead. This avoids the regulatory burden, but the flip side is that most countries want the taxes from that money, and those taxes are due for the tax year in which the ICO occurs. Some sources suggest performing an ICO early in the tax year is advantageous, presumably because the organization has use of the money for potentially more than a year before having to pay taxes. In rapid startup growth plans which have revenue early, this can be viable.

Going global

To avoid regulatory and tax burdens, many ICOs choose their country as carefully as they choose their blockchain base. Given that cryptocurrencies are inherently without country and every regulatory experience is new, this is more reasonable than with IPOs, where both currency and IPO experience in a specific country matter more.

Sidebar: In the first article I mentioned the post-Westphalian nature of cryptocurrencies. It’s worth elaborating on that slightly for the purposes of this discussion. The Peace of Westphalia was a series of treaties signed in 1648 which formally ended both the 30 Years War and the 80 Years War, which were both Catholic vs Protestant wars and a war between the Roman Empire and a bunch of mostly Protestant nations.

The important point is that the treaties embodied a set of principles about what sovereign nations were, something which has become known as Westphalian Sovereignty. That concept says that nations have complete say within their borders, weren’t supposed to interfere in other nations’ internal affairs and that all nations are equal, even the smallest. One of the elements of national control which emerged from this was a specific monetary unit developed and managed by the country.

The gold standard was formally established in 1944 with the Bretton Woods Agreement of 1944. That international agreement established the mechanisms for rebalancing fiscal valuation imbalances by shipping gold between nations. That didn’t last long, as the USA’s currency exceeded the amount of gold available within 20 years and the gold standard was abandoned globally in 1973 with currencies floating on exchange markets. It’s still lamented by many survivalists and Libertarians which is ironic as they are also two of the three natural markets for cryptocurrencies.

Arguably, bitcoin is the first post-Westphalian currency and is part of the emerging post-Westphalian world, which likely also includes the United Nations and its Responsibility to Protect (R2P) doctrine. Cryptocurrencies are without borders and not tied to a specific nation. You could also make that argument for the euro, but it’s still tied to a geographically bound political entity.

Some nations are experimenting with creating their own national cryptocurrency, but it’s unclear what advantage this would give them in a world where the most advanced nations in the world still see a healthy plurality of money exchanged as physical cash. More likely, in my opinion, major long-lasting multinational organizations such as the Catholic Church or zaibatsus will be the first to create internal currencies and possibly shift to paying their staff and vendors in it.

According to people who pay attention, Singapore and Switzerland are both good places to base ICOs, with these tiny countries being in the top 4 countries seeing ICOs along with the USA and Canada. This makes sense given their focus on being international banking hubs providing security and privacy to people who use their services.

Having spent two years in Singapore, I can say that they have a strong focus on maximizing entrepreneurialism and innovation. They do have a tax treaty with the USA, but are, like Ireland, an international location with very low corporate taxes. That’s important given the potential to be taxed based on your ICO proceeds. But even Singapore has challenges. At least ten ICO-based companies saw banks close their bank accounts. Here’s a breakdown of the current state of regulation in countries around the world regarding ICOs to help start the thinking.

The US IRA takes its cut regardless of where the money is made, and that is applied to businesses as well. There are a thicket of tax regulations about US individuals and corporations with foreign interests, regardless of where the business exists.

Canada has established a regulatory sandbox via the Canadian Revenue Agency (CRA) to support fintech innovation, and it’s being used by ICO-bound entrepreneurs. However, all is not a bed of roses there either. One of the first Canadian ICOs to apply was given a set of conditions which would allow it to be given discretionary relief from being considered a “distribution” requiring reliance on an exemption or filing an exemption.

If you are considering taking the ICO plunge, this appears to be a solid set of questions to ask about a country’s regulations and statutes.

Alternative models

ICOs aren’t the only game in town for cleantech entrepreneurs and investors. Two other models deserve attention.

The first is the previously mentioned WePower, which is building a blockchain platform to allow renewable projects to get funding. They started in Europe but have recently expanded to Australia. Their premise is that you can raise capital using their platform by pre-selling commitments to produce electricity. Currently, their model is commitments of 1 KWH and is represented by the WPR token. This allows a common hub similar similar to Kickstarter or GoFundMe but with a clear revenue model and focus on renewable projects. It’s easier to find investors if the investors are on a single platform. WePower’s first client was a 1 GW Spanish solar farm, secured in July of 2017. Note that they are explicit about not permitting US residents to participate at this time due to regulatory uncertainty.

The second is The Sun Exchange. Rather than being an ICO or capital raising model, it allows investors to buy solar panels with bitcoin or fiat currencies and lease them to schools and businesses in sunny Africa. This gets around most of the regulatory burdens and permits small investors to contribute to decarbonization, engage with cryptocurrencies and enjoy some revenue from it.

Lessons for cleantech entrepreneurs

This is far from a complete list, but it’s a reasonable starting list. ICOs aren’t get-rich-quick-schemes that succeed in a weekend. They take work, thought and planning.

Consider one of the alternative models, but don’t forget that they may be just as subject to taxation and regulation.

Incorporate prior to ICO. Among other things, this means that individuals associated with the venture won’t pay taxes until they receive proceeds from it, whether as capital gains or income.

If you are a US company, consider a corporate structure that is arguably foreign with some US stakeholders, not a US entity in a foreign country with dominantly US stakeholders.

Spend time thinking about the jurisdiction to base the ICO in.

You can disintermediate venture capitalists with an ICO, but you can’t get rid of lawyers and accountants with them.

Right now, ICOs are the wild west, more like a penny stock with much bigger numbers and there is a lot of fraud in the space. Regulators are moving in to protect investors.

While cryptocurrencies are post-national, non-fiat currencies, nations are looking to take their cut.

Cryptocurrencies are great, but most people who work in the real world need fiat currencies as payment, so banks that allow proceeds from cryptocurrencies are critical. Having millions is no use if banks refuse to process it.

Just like an effort leading to an IPO, you have to set up a team, invest in intellectual capital, make credible projections of results, establish a plan, create a pitch and then launch the quest for capital.

As always, I’ll be watching the comments closely. If you know of additional cryptocurrency funding examples for cleantech or I’ve made a mistake, let me know.

About the Author

Michael Barnard is Chief Strategist with TFIE Strategy Inc. He works with startups, existing businesses and investors to identify opportunities for significant bottom line growth and cost takeout in our rapidly transforming world. He is editor of The Future is Electric, a Medium publication. He regularly publishes analyses of low-carbon technology and policy in sites including Newsweek, Slate, Forbes, Huffington Post, Quartz, CleanTechnica and RenewEconomy, and his work is regularly included in textbooks. Third-party articles on his analyses and interviews have been published in dozens of news sites globally and have reached #1 on Reddit Science. Much of his work originates on Quora.com, where Mike has been a Top Writer annually since 2012. He's available for consulting engagements, speaking engagements and Board positions.

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